Sequence Of Returns Risk

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This is the Truth Network. Welcome to Finishing Wealth, brought to you by cardinalguide.com, with certified financial planner, Hans Scheil, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Wealth, we'll examine both biblical and practical knowledge to assist families in finishing wealth, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Wealth. Well, welcome to Finishing Wealth with certified financial planners, Hans Scheil and Tom Griffith. And today's show, actually the title of it may sound a little bit confusing, but I'll try to straighten it out for you. It's called the sequence of returns risk, but actually it's kind of like how to finish well in your income.

And that's critical to understanding kind of the sequence of returns risk. So I imagine that many of you, like me, are going to learn something. I certainly learned something through us seeing parts of this video and talking to Hans and Tom. And so as I was reviewing this in my mind and talking with Hans and Tom, that first Timothy 6-10 just jumped on out there, which I don't know that I've ever spent a lot of time on on this particular show, but I think it's very applicable to this one. It's a familiar verse to many. It says, for the love of money is the root of all evil, which while some coveted after, they erred from the faith and pierced themselves through with many sorrows. Of course, I've heard this misquoted many times. I bet you have. It just says money is the root of all evil.

It's not. Money is a wonderful tool. And certainly what we talk about all the time here on Finishing Well, it's the love of money that trips us up. But the challenge is, you know, it's like a lot of sins you can flirt with, as you're sitting there watching your balances go up in investments and those kind of things, you can't help but kind of, you know, your treasure is where your heart is. And so as you begin to get this stuff in your heart, then all of a sudden it becomes the treasure rather than the kingdom and understanding that God's given you this in order to finish well.

And finish well investing in lots of things and having a plan for that money and using that money wisely so that, right, that it will grow and with many counselors plan succeed. So, you know, there's a lot to talk about in this. I'm going to turn it over to you, Hans.

Okay. Well, I mean, you bailed me out the first time we talked about the love of money and the root of all evil and all that kind of stuff, because I'm sitting here listening to you talk about it. And I'm the first time back a while ago and I'm thinking, well, I must be evil because I don't love money for its own sake, but it is my business.

And so but I get it. I mean, after we talked through this and prayed our way through it, it's not having money. It's not trying to have more money. None of that's bad. I mean, that's a good thing because that's what you do with a retirement account.

And you're getting ready for retirement. It's the love of money where the problem is. And we see clients coming into us that are 100% invested and their retirement account is like 95% of their money that they would call money, money, you know, or a financial asset.

So most of it is in this. They haven't paid taxes on the money yet. They really haven't defined a purpose for it.

And many people that have saved diligently through their 401k, they've just watched it go up, up, up, and they're ready to live off of their Social Security and other money. They're savers. And so we're going to ask people when we hear this, what's this money for?

And then I'm going to shut up. What's the purpose of it? And I have a lot of people say, well, what do you mean what's it for? It's a retirement account.

Yeah. But so what is the purpose of this money to you? When are you going to use this? Well, I don't want to pay any taxes. I just want to see it go up. And you know, and then a lot, some other people we get too much for my income in retirement. I mean, then the people will get, some people will get to that quickly. They know they have to live off this once they quit getting a paycheck.

This is going to supplement their Social Security, but many times they don't have a plan for that. And so what we're getting at here in the biblical verse is that the love of money is if this thing becomes an idol for you and you're joyful when you just watch it go up and you're very sorrowful when you watch it go down, when the markets are having a hard time, like, like we've had some here lately and all of 2022, then, you know, you need to examine yourself a bit and think is, you know, is, is, is this, is this money that I have in the IRA that I haven't paid tax on yet? Is it, is it a form of an idol for me?

And you got some prayer work to do. Oh, great. Yeah. So, I mean, onto what we're talking about in the show today is, is we really explained to you, Robbie, in preparation what the sequence of returns means. And I'm going to let Tom just kind of jump in and define that for why this is different once you retire than it is when you're, say, 40 years old or 50 years old.

Yeah. I mean, I think this is a very important concept to understand, a risk to acknowledge, because most people don't really understand how this works. And so we'll try to take it piece by piece. We do have a document on our website. It's part of our YouTube series, the show notes that are on there that I think are particularly helpful on this.

So if you're, if you're at all interested, go look at those because I think it's helpful to see it on paper how this works. But what the sequence of returns means or what it's talking about is, is when those returns happen. So we know that the market tends to go up over time, but we don't know which year is going to be up, which year is going to be down, which year is going to be flat.

It's random in some sense, right? So we can't predict the future. And so when you're working and you're saving and you're contributing to your 401k, it really does not matter what year is up, what year is down, as long as the average return over time is positive, your money will grow.

So there's an example in the show notes. I don't want to get into all the details of all the numbers, but essentially they take the sequence of returns, you know, some positive, some negative, and they just flip them. So in one sequence, we have positive returns early, and then in negative returns late. In the second sequence, there's negative returns early and positive returns late. The average returns are identical. It's 8% average return over that time. And the ending balance of that account is identical between the two sequences. It does not matter while you're working and saving when those negative returns happen. So that's really what's defined a sequence of returns. Where the risk comes into play is when you enter retirement.

And this is where I often see people miss this, because I will get this all the time. People walk through our door, they've done well saving, they're very disciplined in their investing, they don't make changes based off noise in the market, they stick to the course, which has worked well for them while they've been saving. But they plan to have that same strategy in retirement.

And this, and I'm about to explain this, this is where it really can be problematic. And so in the show notes, we have the same sequence, the same positive early, negative late, and then flip it to the opposite for two returns, except now we're pulling money out. We're taking distributions, we're living off the money. When we have the positive returns early and the negative returns late, that account continues to grow and grow and grow. And it ends up with a pretty substantial balance at the end of their life, which in this example is like 90 years old. On the second person who had the negative returns early, again, it's the same sequence, the same series of returns that's just flipped. So the sequence is different where the negative returns early, they run out of money at 85. So you have one person who has a lot of money left, one person who is out. And the only difference being when those negative returns happen.

So just if I had to summarize that, the sequence of returns risk is going into retirement, having negative returns early, while you pull money out can be very problematic for your retirement. Especially in, right, the times we live in. Because right now, certainly for the people over the last few years, that's exactly what they've experienced, right? Well, exactly.

I mean, so we're going to look at a case study here that is fairly recent. And so we have a guy who had about 900 grand in his IRA or 401k at the beginning of 2022. And he was committed to retire in the middle of 2023.

And then 2022 happened. And his 900 and some grand went down to like 720. And before I hear a bunch of people feeling sorry for him, that's all the money this guy has. He doesn't have $5,000 in the bank besides this either 900 and something or 720 something, nor did he have a plan for how much that could generate other than some simple plans. So when we look at this guy and we're sitting down with him and now he's right at retirement, he had this sequence of returns happen to him the year before he retired. And so he lost 200 and some thousand dollars in because he was very risky. So we said, what are we going to do about this? So we figured out how much he needed to live on.

And he's one of those people that we recommended that he take Social Security early for he and his wife, because that got him more than half of the money that he needs to live off of. And then, you know, we put him in a five-year payout deal that is going to pay him that's all invested, no risk. There's no bad returns. There's no good returns. It just sends him a check for five years.

And then it stops. And then at the end of five years, we sold him another plan that starts for the exact same amount at the end of the five years. And those pay out for the rest of both of their lives. So now we were able to get his money out of the market and put it into something that's guaranteed. And I just asked our fellows this morning, how much did he have left that we still have invested in the market? And the answer was 180,000. So it took 720 minus whatever equals 180,000. We put all that, the bulk of the money into something that's going to pay him an income guarantee.

It doesn't go up and down. And now he can afford, if he has another bad year early, it's just with his extra money or his inflation money, and he's going to leave it there for quite a while. Does that make sense? Oh yeah, way more sense than, you know, run a lot of money. You know, that's the whole, and that's the idea of finishing well from an income standpoint. Because again, you know, you've got to have some resources just to take care of yourself in order to even be generous, you know, for the kingdom.

Well, yeah. And most people want to leave something of this money to their kids. I mean, they want to leave an estate. We're going to get into a lot more details of that coming up in the second segment. This episode is obviously, I shouldn't say obviously, we just want to remind you that it's brought to you by Cardinal Advisors, cardinaladvisors.com, where you can, you know, find the seven worries tab at the top, which, you know, are the seven worries of retirement. And this particular one would be under investments and income.

And so, you know, it's kind of cool. It covers a number of different things. So again, we want you to go to cardinaladvisors.com to get more information, more resources, so you can finish well, including Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. So we're going to be back with so much more of Cardinal Advisors finishing well. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other. Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents.

Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with Certified Financial Planners, Hans Seil and Tom Griffith. And today we're talking about the sequence of returns risk. And we kind of gave you a little background on that today. And fortunately, the second half of the show, we want to talk about some strategies like, okay, what do we do about this, Hans?

Yeah. And there's several things that we try to impress upon people to prepare themselves against all risks, just not this risk. And there's only so much we can do with risk, but we try to get to a much safer position where, and as people age, I mean, it's one thing talking to a couple that are in their mid 60s.

It's another thing talking to a couple that are in their mid 70s. And then you get people in their 80s, as people age, they can accept less and less risk. They worry about it.

They stress about it. And so what we're trying to do is minimize risk for people and get them set up where they can finish well. And so I'm going to let Tom talk about what are some of the strategies that we put in place to protect people against this sequence of returns risk?

Yeah. I mean, I think fundamentally the whole idea that you want to do as you're approaching retirement is start setting up your investments in a way that you have a bucket of money that is not subject to market volatility that allows you to withstand those down years that you can withdraw money from. And so that could take the form of a bunch of different ways. It could be money just literally in the bank, depending on the bank you have that might not be earning a great return, but it's still safe.

It's not moving up and down. There's CDs, there's fixed annuities like MIGAs. The example that Hans was talking about in the beginning of the video or in the first half of the show here was a fixed annuity that had a set number of years it paid out for. So it paid out for five years. It generated the income that the client needed to live off of, which is really what the money is there for in this guy's situation was his money was there to create an income for him in retirement. And he passed us with the goal of not running out.

That's easier said than done, right? But if you've left it all on the market and you have these bad years, as you're pulling money out, it really raised the risk that he was going to run out in his 80s. And so we tried to mitigate that by looking at an annuity that paid out over five years. It had a guaranteed rate of return. We could calculate that for him to show him what he was getting on that money.

And it allowed his investments that weren't tied up in something like that to grow. What we oftentimes will do in conjunction with that is delay Social Security because Social Security is the best source of income that anyone has in retirement. It's adjusted for inflation. It's guaranteed by the federal government. It's coming in as long as you're retired. And so what you can do is you get this guaranteed growth by delaying Social Security. You have a higher check coming in later on that's not tied to the market at all. And you pair that with having an annuity that allows you to get the income you need to delay Social Security.

It works wonderfully. And then a lot of times we had a show, you know, several weeks back on buckets of money. There's another bucket that you can use, another type of annuity that then can start an income once that one runs out and then last the rest of both you and your spouse's life or if it's just you the rest of your life. Some version of that allows you to not have to take investment risk with the money that's really your income is dependent upon. Now you can act more like you were when you were working. The money that's remaining that's still invested in the market, we're not talking about getting out of the market completely, just reducing that money. That money can now stay invested.

You can stay disciplined. You don't have to watch the market whether it's up or down any given day because your income isn't dependent upon that. Now you can act more like you are still saving and working. Ignore the market noise and over time you would expect that to grow over time.

Well yeah and so with the example we just gave, you know, this guy we did the opposite of the first strategy. We told him to start social security now because he already incurred the bad year and this was going to make us have to take less money out of the pot to meet his spending goal. But with a lot of people if they are sitting here and they're coming to us and they're saying I need you know seven thousand dollars a month to live, that's the number. Then we got to pay taxes on whatever we got to pay taxes on to net seven grand a month.

So you know we're probably going to need to solve for eight grand a month or nine grand a month and then you know if we can use social security to meet a good bit of that that makes our job easier. But if we can delay social security for five years or four years then that's just money in the bank that we're going to have this much bigger check at 70. And so then we've got to withdraw money from the invested account and stick it in a five-year payout annuity and that just locks it in. That's money that can't go down in value and then it gets replaced at the end of the five years with a social security check or even a little before that.

So that's how the strategy works is we're just trying to get their some of their money or a lot of their money moved into safe stuff. And delaying social security locks up the future just getting a larger check. Using the fixed rate returns I mean we've now got between five and six percent on these multi-year guaranteed annuities. Even some of the three-year MIGAs or multi-year guaranteed annuities are paying over five percent and it just that isn't going to go down in value with the with the market at all. It's just going to be worth substantially more five years from now or seven years or three years or whatever.

So that's a that's a place and it seems to work better than bonds where you don't have volatility on underlying value. The lifetime income annuities just promise you if you wait so many years to start you're going to get x amount of money. You're going to get a fixed check to both husband and wife and that check's going to keep coming in as long as either the husband or the wife's alive so the survivor is going to get the same amount of money for the rest of their life.

Yeah that always just jumped out to me Hans to be too good to be true. You know and I remember you know and I'm sure there's a lot of listeners out there right now are not familiar right with what exactly an annuity is but in its own way right social security is an annuity and so you paid this money in and then it's going to keep paying you regardless of when you're what you put in runs out right? Well you know it's great and it I mean it starts out the longer you wait to start drawing the more you're going to get. I mean that just makes sense if they start paying you when you're 70 and your spouse is 69 they're going to pay you more than they would have paid you if you started it now if you're 65 and your wife's 64. So and then plus if you give them the money now you're going to earn interest on all that money but they're going to tell you that number starting at 70 now okay and then if you when you get to 70 if you say man I don't need the money and I certainly like it growing then you could just optionally wait till you're 75 for instance and then you're going to get a lot more for the life of both of you and that makes sense because now they've got five more years of interest compounding and then they've got a shorter life expectancy of the survivor of these two people. So you know it's the kind of thing you can start when we put people in these we have a specific plan and we show it to them we're going to start this thing at 70 or 72 or some number and we show them what that number is but that doesn't mean we're going to execute them all that way and that stuff is all guaranteed those numbers are all guaranteed there is no sequence of returns risk so never do we tell you to put all your money in one of these strategies we're just trying to guarantee a certain amount of income for the rest of your life plus social security and then whatever money it takes to do that we do it and that that leaves the money we don't need for that that we're going to leave invested and we can take the hit if it happens. I also want to point out that not all annuities work exactly the same way so I think too often it just gets painted in a broad stroke an annuity is an annuity in reality there are all sorts of different types of annuities so this is a specific type of annuity we use that's designed for an income and so if you have something don't just assume that it's going to work great because we see them all the time where they weren't really designed properly or in the way that we would have designed them and so it needs to be the right type of annuity to produce the income. Right and even in you know your show notes on this you show different kinds of annuities as part of the way to you know part of the solution. Well sure and so we don't try to actually do the financial planning in the general sense you know on the show or the videos I mean what we're doing is we're identifying the problem we're needing to solve making you aware of it and then mixing it in with the other problems you got to solve considering the money you have and then we're making a recommendation and with most people it ends up being a combination of some money in an immediate annuity that maybe lasts five years another amount of money in something that the income starts in five years and then another amount of money might be in a MIGA with a guaranteed five to six percent return for a number of years and then another amount of money could be managed in the markets where we're managing risk on that as well but we're investing it and planning for some significant returns. Wow as always we've run out of time before we ran out of show but you can see you need to go to cardinalguide.com and cardinalguide.com you can you can find out how to contact Hans contact Tom right there under the contact part or you know if you go to the seven worries tab you're going to find out all sorts of information and then down lower in the screen what is it called Tom that has all the show notes there's a learning center section on our website and if you click there you'll see a show notes option and you can see all the show notes from our youtube shows and that's what we do the radio on as well yeah awesome and so again and there you'll also find Hans's book the complete cardinal guide to planning for and living in retirement all sorts of sources all sorts of resources so you too can finish well we're so grateful for your listening today and thanks guys thank you thank you the opinions expressed by hans shile and guests on this show or their own and do not reflect the opinions of this radio station all statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such any statements or opinions are subject to change without notice investments involve risk and unless otherwise stated or not guaranteed past performance cannot be used as an indicator to determine future results any strategies mentioned may not be suitable for everyone information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you before acting on any information mentioned please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation finishing well is designed to provide accurate and authoritative information with regard to the subject covered investment advisory services offered through brookstone capital management llc abbreviated bcm a registered investment advisor bcm and cardinal advisors are independent of each other insurance products and services are not offered through bcm but are offered and sold through individually licensed and appointed agents cardinal advisors is not affiliated with or endorsed by the social security administration or any other government agency we hope you enjoyed finishing well brought to you by cardinalguide.com visit cardinalguide.com for free downloads of this show or previous shows on topics such as social security medicare iras long-term care life insurance investments and taxes as well as hans best-selling book the complete cardinal guide to planning for and living in retirement and the workbook once again for dozens of free resources past shows or to get hans book go to cardinalguide.com if you have a question comment or suggestion for future shows click on the finishing well radio show on the website and send us a word once again that's cardinalguide.com cardinalguide.com this is the truth network